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EX-31.1 - JOHNSON OUTDOORS INCexhibit31-11april2016.htm
EX-31.2 - JOHNSON OUTDOORS INCexhibit31-21april2016.htm
EX-32 - JOHNSON OUTDOORS INCexhibit321april2016.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended April 1, 2016
 
OR
 
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to _________
 
Commission file number 0-16255
 
JOHNSON OUTDOORS INC.
(Exact name of Registrant as specified in its charter)
 
Wisconsin
(State or other jurisdiction of
incorporation or organization)
 
39-1536083
(I.R.S. Employer Identification No.)
 
555 Main Street, Racine, Wisconsin 53403
(Address of principal executive offices)
 
(262) 631-6600
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ]   No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ X ]   No [   ]
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer [  ] Accelerated filer [X] Non-accelerated filer (do not check if a smaller reporting company) [  ] Smaller reporting company [   ]
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]   No [ X ]
 
As of April 29, 2016, 8,808,905 shares of Class A and 1,212,382 shares of Class B common stock of the Registrant were outstanding.
 
 
 
 
 
 
 

 
JOHNSON OUTDOORS, INC.
 
 
 
 

           
           
Index
 
Page No.
 
         
PART I
FINANCIAL INFORMATION
     
 
Item 1.
Financial Statements
     
   
Condensed Consolidated Statements of Operations – Three and six months ended April 1, 2016 and April 3, 2015
    1  
   
Condensed Consolidated Statements of Comprehensive  Income (Loss) – Three and six months ended April 1, 2016 and April 3, 2015
    2  
   
Condensed Consolidated Balance Sheets – April 1, 2016, October 2, 2015 and April 3, 2015
    3  
   
Condensed Consolidated Statements of Cash Flows – Six months ended April 1, 2016 and April 3, 2015
    4  
   
Notes to Condensed Consolidated Financial Statements
    5  
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
    21  
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
    28  
 
Item 4.
Controls and Procedures
    29  
           
PART II
OTHER INFORMATION
       
 
Item 1.
Legal Proceedings
    30  
 
Item 1A.
Risk Factors
    30  
 
Item 6.
Exhibits
    30  
   
Signatures
    31  
   
Exhibit Index
    32  
 
 
 
 
 
 
 

.
 
JOHNSON OUTDOORS, INC.
 
PART I               FINANCIAL INFORMATION
Item 1.                Financial Statements
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)



                         
   
Three Months Ended
   
Six Months Ended
 
   
April 1
   
April 3
   
April 1
   
April 3
 
(thousands, except per share data)
 
2016
   
2015
   
2016
   
2015
 
Net sales
  $ 134,192     $ 133,111     $ 219,490     $ 203,933  
Cost of sales
    79,197       81,175       131,196       124,663  
Gross profit
    54,995       51,936       88,294       79,270  
Operating expenses:
                               
Marketing and selling
    25,776       27,645       45,775       46,144  
Administrative management, finance and information systems
    9,891       12,404       20,045       24,315  
Research and development
    4,190       4,264       8,236       8,519  
Total operating expenses
    39,857       44,313       74,056       78,978  
Operating profit
    15,138       7,623       14,238       292  
Interest income
    (10 )     (8 )     (18 )     (30 )
Interest expense
    297       316       487       503  
Other expense (income)
    182       495       (381 )     (77 )
Profit (loss) before income taxes
    14,669       6,820       14,150       (104 )
Income tax expense
    5,348       3,174       5,363       444  
Net income (loss)
  $ 9,321     $ 3,646     $ 8,787     $ (548` )
                                 
Weighted average common shares - Basic:
                               
Class A
    8,636       8,513       8,609       8,491  
Class B
    1,212       1,212       1,212       1,212  
Participating securities
    -       -       -       -  
Dilutive stock options and restricted stock units
    -       -       -       -  
Weighted average common shares - Dilutive
    9,848       9,725       9,821       9,703  
Net income (loss) per common share - Basic:
                               
Class A
  $ 0.94     $ 0.37     $ 0.89     $ (0.06 )
Class B
  $ 0.86     $ 0.34     $ 0.81     $ (0.06 )
Net income (loss) per common share - Diluted:
                               
Class A
  $ 0.93     $ 0.36     $ 0.88     $ (0.06 )
Class B
  $ 0.93     $ 0.36     $ 0.88     $ (0.06 )
Dividends declared per common share:
                               
Class A
  $ 0.08     $ 0.08     $ 0.16     $ 0.15  
Class B
  $ 0.07     $ 0.07     $ 0.15     $ 0.14  

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
 
 
1

 
JOHNSON OUTDOORS, INC.


 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)


                         
                         
 
Three Months Ended
 
Six Months Ended
 
 
April 1
 
April 3
 
April 1
 
April 3
 
(thousands, except per share data)
2016
 
2015
 
2016
 
2015
 
Comprehensive income (loss):
                       
Net income (loss)
  $ 9,321     $ 3,646     $ 8,787     $ (548 )
Other comprehensive income (loss):
                               
Foreign currency translation gain (loss)
    3,048       (5,192 )     1,271       (8,746 )
Change in pension plans, net of tax of $59, $98, $118 and $98, respectively
    97       (13 )     193       72  
Total other comprehensive income (loss)
    3,145       (5,205 )     1,464       (8,674 )
Total comprehensive income (loss)
  $ 12,466     $ (1,559 )   $ 10,251     $ (9,222 )
                                 
                                 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
 
2

 
JOHNSON OUTDOORS, INC.

 
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

                   
                   
   
April 1
   
October 2
   
April 3
 
(thousands, except share data)
 
2016
   
2015
   
2015
 
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
  $ 50,938     $ 69,159     $ 48,906  
Accounts receivable, net
    102,786       44,798       110,817  
Inventories
    89,769       79,919       79,752  
Other current assets
    4,573       4,845       5,764  
Total current assets
    248,066       198,721       245,239  
Property, plant and equipment, net of accumulated
                       
depreciation of $122,369, $116,902 and $111,439, respectively
    45,862       45,287       44,741  
Deferred income taxes
    16,389       15,867       12,808  
Goodwill
    16,672       14,292       14,309  
Other intangible assets, net
    14,435       11,688       12,088  
Other assets
    13,365       13,349       13,666  
Total assets
  $ 354,789     $ 299,204     $ 342,851  
LIABILITIES AND SHAREHOLDERS' EQUITY
                       
Current liabilities:
                       
Short-term debt
  $ -     $ -     $ -  
Current maturities of long-term debt
    373       368       359  
Accounts payable
    40,966       28,455       40,923  
Accrued liabilities:
                       
Salaries, wages and benefits
    12,162       16,815       11,872  
Accrued warranty
    4,735       4,301       4,219  
Income taxes payable
    7,618       3,837       1,203  
Other
    20,274       15,778       17,764  
Total current liabilities
    86,128       69,554       76,340  
Long-term debt, less current maturities
    37,172       7,062       55,333  
Deferred income taxes
    1,266       1,182       1,221  
Retirement benefits
    9,901       10,118       8,388  
Other liabilities
    13,133       13,320       13,526  
Total liabilities
    147,600       101,236       154,808  
Shareholders' equity:
                       
Preferred stock:  none issued
    -       -       -  
Common stock:
                       
Class A shares issued and outstanding:
    441       441       441  
April 1, 2016:  8,808,905
                       
October 2, 2015:  8,770,612
                       
April 3, 2015:  8,792,341
                       
Class B shares issued and outstanding:
    61       61       61  
April 1, 2016:  1,212,382
                       
October 2, 2015:  1,212,382
                       
April 3, 2015:  1,212,382
                       
Capital in excess of par value
    70,084       69,545       68,672  
Retained earnings
    132,374       125,173       115,541  
Accumulated other comprehensive income
    5,101       3,637       4,104  
Treasury stock at cost, shares of Class A common
                       
stock:  33,599, 33,241 and 26,510, respectively
    (872 )     (889 )     (776 )
Total shareholders' equity
    207,189       197,968       188,043  
Total liabilities and shareholders' equity
  $ 354,789     $ 299,204     $ 342,851  

 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
 
 
3

 
JOHNSON OUTDOORS, INC.

 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

             
             
   
Six Months Ended
 
(thousands)
 
April 1 2016
   
April 3 2015
 
CASH USED FOR OPERATING ACTIVITIES
 
 
       
Net income (loss)
  $ 8,787     $ (548 )
Adjustments to reconcile net income (loss) to net cash used for operating activities:
               
Depreciation
    5,220       5,243  
Amortization of intangible assets
    430       428  
Amortization of deferred financing costs
    61       61  
Stock based compensation
    947       967  
Deferred income taxes
    (302 )     432  
Change in operating assets and liabilities:
               
Accounts receivable, net
    (57,481 )     (67,982 )
Inventories, net
    (9,080 )     (15,692 )
Accounts payable and accrued liabilities
    16,146       17,550  
Other current assets
    377       1,499  
Other non-current assets
    23       (61 )
Other long-term liabilities
    (444 )     6  
Other, net
    (179 )     255  
 
    (35,495 )     (57,842 )
CASH USED FOR INVESTING ACTIVITIES
               
Payments for purchase of business
    (5,250 )     -  
Capital expenditures
    (5,608 )     (4,163 )
 
    (10,858 )     (4,163 )
CASH PROVIDED BY FINANCING ACTIVITIES
               
Net borrowings from revolving credit lines
    30,000       48,084  
Principal payments on term loans and other long-term debt
    (180 )     (183 )
Common stock transactions
    22       (175 )
Dividends paid
    (1,583 )     (1,483 )
Purchases of treasury stock
    (476 )     (501 )
      27,783       45,742  
Effect of foreign currency rate changes on cash
    349       (5,624 )
Decrease in cash and cash equivalents
    (18,221 )     (21,887 )
CASH AND CASH EQUIVALENTS
               
Beginning of period
    69,159       70,793  
End of period
  $ 50,938     $ 48,906  



The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
 
4

 
JOHNSON OUTDOORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 
1       BASIS OF PRESENTATION
 
The condensed consolidated financial statements included herein are unaudited. In the opinion of management, these statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Johnson Outdoors Inc. and subsidiaries (collectively, the “Company”) as of April 1, 2016 and April 3, 2015, and their results of operations for the three and six month periods then ended and cash flows for the six month periods then ended. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 2, 2015 which was filed with the Securities and Exchange Commission on December 8, 2015, and amended by Amendment No. 1 filed on December 11, 2015 with the Securities and Exchange Commission.
 
 
Due to seasonal variations and other factors, the results of operations for the three and six months ended April 1, 2016 are not necessarily indicative of the results to be expected for the Company's full 2016 fiscal year.  See “Seasonality” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein for additional information.
 
All monetary amounts, other than share and per share amounts, are stated in thousands. 
 
 
2       ACCOUNTS RECEIVABLE
 
Accounts receivable are stated net of allowances for doubtful accounts of $2,310, $2,329 and $2,338 as of the periods ended April 1, 2016, October 2, 2015 and April 3, 2015, respectively. The increase in net accounts receivable to $102,786 as of April 1, 2016 from $44,798 as of October 2, 2015 is attributable to the seasonal nature of the Company's business. The determination of the allowance for doubtful accounts is based on a combination of factors. In circumstances where specific collection concerns about a receivable exist, a reserve is established to value the affected account receivable at an amount the Company believes will be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on historical experience of bad debts as a percent of accounts receivable outstanding for each business unit. Uncollectible accounts are written off against the allowance for doubtful accounts after collection efforts have been exhausted. The Company typically does not require collateral on its accounts receivable.
 
 
3       EARNINGS PER SHARE (“EPS”)
 
Net income or loss per share of Class A common stock and Class B common stock is computed using the two-class method.  Grants of restricted stock which receive non-forfeitable dividends are classified as participating securities and are required to be included as part of the basic weighted average share calculation under the two-class method.
 
Holders of Class A common stock are entitled to cash dividends equal to 110% of all dividends declared and paid on each share of Class B common stock. The Company grants shares of unvested restricted stock in the form of Class A shares, which carry the same distribution rights as the Class A common stock described above.  As such, the undistributed earnings for each period are allocated to each class of common stock based on the proportionate share of the amount of cash dividends that each such class is entitled to receive.
 
 
 
5

 
JOHNSON OUTDOORS, INC.
 
Basic EPS
 
Basic net income or loss per share is computed by dividing net income or loss allocated to Class A common stock and Class B common stock by the weighted-average number of shares of Class A common stock and Class B common stock outstanding, respectively.  In periods with cumulative year to date net income and undistributed income, the undistributed income for each period is allocated to each class of common stock based on the proportionate share of the amount of cash dividends that each such class is entitled to receive.  In periods where there is a cumulative year to date net loss or no undistributed income because distributions through dividends exceed net income, Class B shares are treated as anti-dilutive and, therefore, net losses are allocated equally on a per share basis among all participating securities.
 
For the three and six month periods ended April 1, 2016 and the three month period ended April 3, 2015, basic income per share for the Class A and Class B shares has been presented using the two class method and reflects the allocation of undistributed income described above.  For the six month period ended April 3, 2015, basic loss per share for Class A and Class B shares was the same because there were no cumulative undistributed earnings on a year to date basis and basic loss per share for Class A and Class B shares has been presented using the two class method described above.
 
Diluted EPS
 
Diluted net income per share is computed by dividing allocated net income by the weighted-average number of common shares outstanding, adjusted for the effect of dilutive stock options, restricted stock units (“stock units” or “units”) and non-vested restricted stock.  Anti-dilutive stock options, units and non-vested stock are excluded from the calculation of diluted EPS.  The computation of diluted net income per share of Class A common stock assumes that Class B common stock is converted into Class A common stock.  Therefore, diluted net income per share is the same for both Class A and Class B common shares.  In periods where the Company reports a net loss, the effect of anti-dilutive stock options and units is excluded and diluted loss per share is equal to basic loss per share for both classes.
 
For the six month period ended April 3, 2015, the effects of stock options and non-vested restricted stock units are excluded from the diluted loss per share calculation as their inclusion would have been anti-dilutive.
 
Stock options that could potentially dilute earnings per share in the future which were not included in the fully diluted computation because they would have been anti-dilutive were 0 and 9,216 for the three and six month periods ended April 1, 2016 and April 3, 2015, respectively.  Non-vested stock that could potentially dilute earnings per share in the future which were not included in the fully diluted computation because they would have been anti-dilutive totaled 170,357 and 278,659 for the three months ended April 1, 2016 and April 3, 2015, respectively, and 178,435 and 293,907 for the six months ended April 1, 2016 and April 3, 2015, respectively.  Restricted stock units that could potentially dilute earnings per share in the future which were not included in the fully diluted computation because they would have been anti-dilutive were 48,456 and 10,088 for the three month periods ended April 1, 2016 and April 3, 2015, respectively, and 48,456 and 10,088 for the six month periods ended April 1, 2016 and April 3, 2015, respectively.

 
4       STOCK-BASED COMPENSATION AND STOCK OWNERSHIP PLANS
 
The Company’s current stock ownership plans allow for issuance of stock options to acquire shares of Class A common stock by key executives and non-employee directors. Current plans also allow for issuance of shares of restricted stock, restricted stock units or stock appreciation rights in lieu of stock options.
 
Under the Company’s 2010 Long-Term Stock Incentive Plan and the 2012 Non-Employee Director Stock Ownership Plan (the only two plans where shares remain available for equity incentive awards) there were 581,832 shares of the Company’s Class A common stock available for future grant to key executives and non-employee directors at April 1, 2016.
 
 
 
6

 
JOHNSON OUTDOORS, INC.
 
Stock Options
 
To the extent outstanding, all of the Company’s stock options outstanding during the periods covered by this Report are fully vested, with no further compensation expense to be recorded. There were no grants of stock options during either of the six month periods ended April 1, 2016 or April 3, 2015.  As of April 1, 2016, no further stock options were outstanding.
 
Non-vested Stock
 
All shares of non-vested stock awarded by the Company have been granted at their fair market value on the date of grant and vest within two to five years after the grant date.  The fair value at date of grant is based on the number of shares granted and the average of the Company’s high and low Class A common stock price on the date of grant or, if the Company’s Class A shares did not trade on the date of grant, the average of the Company’s high and low Class A common stock price on the last preceding date on which the Company’s Class A shares traded.
 
A summary of non-vested stock activity for the six months ended April 1, 2016 related to the Company’s stock ownership plans is as follows:
 
             
             
       
Weighted Average
 
   
Shares
 
Grant Price
 
Non-vested stock at October 2, 2015
    214,027     $ 21.43  
Non-vested stock grants
    54,850       24.16  
Restricted stock vested
    (98,520 )     21.48  
Non-vested stock at April 1, 2016
    170,357       23.62  
 
Non-vested stock grantees may elect to reimburse the Company for withholding taxes due as a result of the vesting of shares by tendering a portion of the vested shares back to the Company. Shares tendered back to the Company were 19,973 and 16,915 during the six month periods ended April 1, 2016 and April 3, 2015, respectively.
 
Stock compensation expense, net of forfeitures, related to non-vested stock was $332 and $436 for the three month periods ended April 1, 2016 and April 3, 2015, respectively, and $680 and $839 for the six month periods ended April 1, 2016 and April 3, 2015, respectively.  Unrecognized compensation cost related to non-vested stock as of April 1, 2016 was $2,075, which amount will be amortized to expense through November 2019 or adjusted for changes in future estimated or actual forfeitures.
 
The fair value of restricted stock vested during the six month periods ended April 1, 2016 and April 3, 2015 was $2,349 and $2,346, respectively.
 
Restricted Stock Units
 
All restricted stock units awarded by the Company have been granted at their fair market value on the date of grant and vest within one or three years after the grant date.  The fair value at date of grant is based on the number of units granted and the average of the Company’s high and low Class A common stock trading price on the date of grant or, if the Company’s Class A shares did not trade on the date of grant, the average of the Company’s high and low Class A common stock trading price on the last preceding date on which the Company’s Class A shares traded.  There were 48,456 restricted stock units unvested and outstanding as of April 1, 2016 with a weighted average grant date fair value of $23.65.  There were 10,088 restricted stock units unvested and outstanding as of April 3, 2015 with a weighted average grant date fair value of $31.23.
 
 
 
7

 
JOHNSON OUTDOORS, INC.
 
 
The Company issued 14,070 restricted stock units at a weighted average grant price of $22.39 during the three month period ended April 1, 2016 and 48,456 restricted stock units at a weighted average grant price of $23.65 during the six month period ended April 1, 2016.  The Company issued 7,336 restricted stock units at a weighted average grant price of $33.40 during the three and six month periods ended April 3, 2015.
 
Stock compensation expense, net of forfeitures, related to restricted stock units was $137 for the three months ended April 1, 2016 and $267 for the six months ended April 1, 2016.  Stock compensation expense, net of forfeitures, related to restricted stock units was $67 for the three months ended April 3, 2015 and $128 for the six month period ended April 3, 2015.  Unrecognized compensation cost related to non-vested restricted stock units as of April 1, 2016 was $981, which amount will be amortized to expense through September 2018 or adjusted for changes in future estimated or actual forfeitures.
 
Employees’ Stock Purchase Plan
 
The Company’s shareholders have adopted the Johnson Outdoors Inc. 2009 Employees’ Stock Purchase Plan which provides for the issuance of shares of Class A common stock at a purchase price of not less than 85% of the fair market value of such shares on the date of grant or at the end of the offering period, whichever is lower.
 
The Company did not issue any shares of Class A common stock under the Employees’ Stock Purchase Plan during any of the three or six month periods ended April 1, 2016 or April 3, 2015.
 
5           PENSION PLANS

The Company has non-contributory defined benefit pension plans covering certain of its U.S. employees. Retirement benefits are generally provided based on the employees’ years of service and average earnings. Normal retirement age is 65, with provisions for earlier retirement.   
 
The components of net periodic benefit cost related to Company sponsored defined benefit plans for the three and six month periods ended April 1, 2016 and April 3, 2015 were as follows:
 
      
                         
                         
 
Three Months Ended
 
Six Months Ended
 
 
April 1
 
April 3
 
April 1
 
April 3
 
 
2016
 
2015
 
2016
 
2015
 
                         
Components of net periodic benefit cost:
                       
Service cost
  $ -     $ -     $ -     $ -  
Interest on projected benefit obligation
    277       270       554       539  
Less estimated return on plan assets
    299       220       598       494  
Amortization of unrecognized losses
    155       86       310       171  
Net periodic benefit cost
  $ 133     $ 136     $ 266     $ 216  
 
 
 
 
 
8

 
JOHNSON OUTDOORS, INC.
 
6       INCOME TAXES
 
For the three and six months ended April 1, 2016 and April 3, 2015, the Company’s earnings before income taxes, income tax expense and effective income tax rate were as follows:

                         
                         
 
Three Months Ended
 
Six Months Ended
 
 
April 1
 
April 3
 
April 1
 
April 3
 
(thousands, except tax rate data)
2016
 
2015
 
2016
 
2015
 
Profit (loss) before income taxes
  $ 14,669     $ 6,820     $ 14,150     $ (104 )
Income tax expense
    5,348       3,174       5,363       444  
Effective income tax rate
    36.5 %     46.5 %     37.9 %     -426.9 %
                                 
 
The change in the Company’s effective tax rate for the three months ended April 1, 2016 versus the prior year three month period was due to variances in income for entities with a valuation allowance and the unfavorable discrete state tax expense items recorded in the prior year three month period.
 
The change in the Company’s effective tax rate for the six months ended April 1, 2016 versus the prior year to date period was primarily due to the impact of positive earnings in the current year periods compared to negative earnings in the prior year to date period.
 
Variances in income or loss for entities that have a valuation allowance, primarily in non-US tax jurisdictions, will drive fluctuations in the effective tax rate.  The impact of the Company’s operations in these foreign locations is removed from overall effective tax rate methodology and recorded directly based on year to date results for the year for which no tax expense or benefit can be recognized.  The tax jurisdictions that have a valuation allowance for the periods ended April 1, 2016 and April 3, 2015 were:
 
   
April 1
April 3
2016
2015
Australia
France
France
Indonesia
Japan
Italy
Netherlands
Japan
New Zealand
Netherlands
Spain
New Zealand
Switzerland
Spain
   
 
The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes.  As a result, the Company may adjust the reserves for unrecognized tax benefits due to the impact of changes in its assumptions or as a result of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities and lapses of statutes of limitation.  The Company’s 2016 fiscal year tax expense is anticipated to include approximately $400 related to uncertain income tax positions.
 
9

 
JOHNSON OUTDOORS, INC.
 
In accordance with its accounting policy, the Company recognizes accrued interest and penalties related to unrecognized benefits as a component of income tax expense.  The Company is projecting accrued interest of $200 related to uncertain income tax positions for the fiscal year ending September 30, 2016.

The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign taxing jurisdictions.   The Company is currently undergoing income tax examinations in Italy and Germany.  As of the date of this report, the following tax years remain subject to examination by the respective tax jurisdictions:

   
Jurisdiction
Fiscal Years
United States
2012-2015
Canada
2011-2015
France
2011-2015
Germany
2010-2015
Italy
2010-2015
Japan
2012-2015
Switzerland
2005-2015
 
Pursuant to ASU No. 2015-17, the Company reclassified current deferred tax assets of $8,613 and $10,649 to non-current deferred tax assets, as of April 3, 2015, October 2, 2015, respectively.  See “Note 14 – New Accounting Pronouncements” for additional information.
 
7       INVENTORIES
 
Inventories at the end of the respective periods consisted of the following:
 

                   
 
April 1
 
October 2
 
April 3
 
 
2016
 
2015
 
2015
 
Raw materials
  $ 33,028     $ 34,711     $ 34,655  
Work in process
    155       24       121  
Finished goods
    56,586       45,184       44,976  
    $ 89,769     $ 79,919     $ 79,752  
 
 
8       GOODWILL

The changes in goodwill during the six months ended April 1, 2016 and April 3, 2015 were as follows:

             
 
April 1
 
April 3
 
 
2016
 
2015
 
Balance at beginning of period
  $ 14,292     $ 14,416  
Acquisitions
    2,338       -  
Amount attributable to movements in foreign currency rates
    42       (107 )
Balance at end of period
  $ 16,672     $ 14,309  
 
 
 
 
 
10

 
JOHNSON OUTDOORS, INC.
 
We evaluate the carrying value of long-lived assets, including intangible assets subject to amortization, when events and circumstances warrant such an evaluation. During the second quarter of fiscal 2016, the Company re-evaluated its projections for its Diving reporting unit, based on lower than anticipated results due to continuing market dislocation and economic factors. In conducting this analysis, the Company evaluated its cash flows for the Diving reporting unit over a five-year period.  Based on the Company’s goodwill assessment, the fair value of the Diving reporting unit exceeded its carrying value by approximately 9%. The Company believes its assumptions are reasonable, however, the fair value of the reporting unit is close to its carrying amount, including goodwill, and is sensitive to changes in assumptions. There can be no assurance that its estimates and assumptions made for purposes of its goodwill impairment testing, at the annual date and the interim testing date, will prove to be accurate predictions of the future. A sustained decline in Diving sales,  unfavorable operating margins, lack of new product acceptance by consumers, changes in customer trends, an increase in the discount rate, and/or a decrease in our projected long-term growth rates used in the discounted cash flow model could result in significant changes to the goodwill impairment analysis going forward, including a potential significant goodwill impairment charge during a future statement period.

9       WARRANTIES

The Company provides warranties on certain of its products as they are sold. The following table summarizes the Company's warranty activity for the six months ended April 1, 2016 and April 3, 2015.
             
             
 
April 1
 
April 3
 
 
2016
 
2015
 
Balance at beginning of period
  $ 4,301     $ 4,078  
Expense accruals for warranties issued during the period
    2,337       2,304  
Less current period warranty claims paid
    1,903       2,163  
Balance at end of period
  $ 4,735     $ 4,219  
 
10       CONTINGENCIES
 
The Company is subject to various legal actions and proceedings in the normal course of business, including those related to commercial disputes, product liability, intellectual property and regulatory matters. The Company is insured against loss for certain of these matters. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, management does not believe the final outcome of any pending litigation will have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.   See “Part II-Other Information, Item 1-Legal Proceedings” for additional information on certain litigation commenced by the Company against a third party.
 
11       INDEBTEDNESS
 
Debt was comprised of the following at April 1, 2016, October 2, 2015, and April 3, 2015:
                   
                   
   
April 1
2016
   
October 2
2015
   
April 3
2015
 
Term loans
  $ 7,251     $ 7,430     $ 7,608  
Revolvers
    30,000       -       48,084  
Other
    294       -       -  
Total debt
    37,545       7,430       55,692  
Less current portion of long term debt
    373       368       359  
Less short term debt
    -       -       -  
Total long-term debt
  $ 37,172     $ 7,062     $ 55,333  
 
 
 

 
 
11

 
JOHNSON OUTDOORS, INC.
 
Term Loans
The Company’s term loans have a maturity date of September 29, 2029.  Each term loan requires monthly payments of principal and interest. Interest on the aggregate outstanding amount of the term loans is based on the prime rate plus an applicable margin.  The interest rate in effect on the term loans was 5.5% and 5.25% at April 1, 2016 and April 3, 2015, respectively.

The term loans are guaranteed in part under the United States Department of Agriculture Rural Development program and are secured with a first priority lien on land, buildings, machinery and equipment of the Company’s domestic subsidiaries and a second lien on working capital and certain patents and trademarks of the Company and its subsidiaries.  Any proceeds from the sale of secured property are first applied against the related term loans and then against the Revolvers (as defined below). The Company’s term loans include covenants related to its current ratio, debt to net worth ratio, fixed charge ratio, minimum net worth and capital expenditures.

The aggregate term loan borrowings are subject to a pre-payment penalty.  The penalty is currently 4% of the pre-payment amount, and the penalty will decrease by 1% annually on the anniversary date of the effective date of the applicable loan agreement.

Revolvers
On September 16, 2013, the Company and certain of its subsidiaries entered into a credit facility with PNC Bank National Association and certain other lenders.  This credit facility consists of a Revolving Credit Agreement dated September 16, 2013 among the Company, certain of the Company’s subsidiaries, PNC Bank National Association, as lender and as administrative agent, and the other lenders named therein (the “Revolving Credit Agreement” or “Revolver”).  The Revolver has an expiration date of September 16, 2018 and provides for borrowing of up to an aggregate principal amount not to exceed $90,000 with an accordion feature that gives the Company the option to increase the maximum seasonal financing availability subject to the conditions of the Revolving Credit Agreement and subject to the approval of the lenders.  The Revolver imposes a seasonal borrowing limit such that borrowings may not exceed $60,000 from the period June 30th through October 31st of each year under the agreement.

The interest rate on the Revolver resets each quarter and is based on LIBOR plus an applicable margin.  The applicable margin ranges from 1.25 percent to 2.00 percent and is dependent on the Company’s leverage ratio for the trailing twelve month period.  The interest rate on the Revolver at April 1, 2016 and April 3, 2015 was approximately 1.7% and 1.4%, respectively.

The Revolver is secured with a first priority lien on working capital assets and certain patents and trademarks of the Company and its subsidiaries and a second priority lien on land, buildings, machinery and equipment of the Company’s domestic subsidiaries.  Under the terms of the Revolver, the Company is required to comply with certain financial and non-financial covenants.  The Revolving Credit Agreement limits asset or stock acquisitions to no more than $20,000 in the event that the Company’s consolidated leverage ratio is greater than 2.5 times.  No limits are imposed if the Company’s consolidated leverage ratio is less than 2.5 times and the remaining borrowing availability under the Revolver is greater than $10,000 at the time of the acquisition.  The Revolving Credit Agreement limits the amount of restricted payments (primarily dividends and repurchases of common stock) made during each fiscal year.  The Company may declare and pay dividends in accordance with historical practices, but in no event may the aggregate amount of all dividends or repurchases of common stock exceed $10,000 in any fiscal year.  The Revolving Credit Agreement restricts the Company’s ability to incur additional debt and includes maximum leverage ratio and minimum interest coverage ratio covenants.
 
 
 
12

 
JOHNSON OUTDOORS, INC.

Other Borrowings
The Company had no unsecured revolving credit facilities at its foreign subsidiaries as of April 1, 2016 or April 3, 2015.  The Company utilizes letters of credit primarily as security for the payment of future claims under its workers’ compensation insurance, which totaled approximately $680 and $646 at April 1, 2016 and April 3, 2015, respectively.  The Company had no unsecured lines of credit as of April 1, 2016 or April 3, 2015.

Aggregate scheduled maturities of long-term debt as of April 1, 2016, for the remainder of fiscal 2016 and subsequent fiscal years, were as follows:

       
Fiscal Year
     
2016
  $ 152  
2017
    381  
2018
    30,403  
2019
    426  
2020
    743  
Thereafter
    5,440  
Total
  $ 37,545  

Balances carried on the Revolver not in excess of the seasonal borrowing limit may be repaid at the Company’s discretion at any time through the maturity date.

Interest paid for the three month periods ended April 1, 2016 and April 3, 2015 was $267 and $256, respectively.  Interest paid for the six month periods ended April 1, 2016 and April 3, 2015 was $402 and $412, respectively.

Based on the borrowing rates currently available to the Company for debt with similar terms and maturities, the fair value of the Company’s long-term debt as of April 1, 2016 and April 3, 2015 approximated its carrying value.
 
 
 
12       DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
The following disclosures describe the Company’s objectives in using derivative instruments, the business purpose or context for using derivative instruments, and how the Company believes the use of derivative instruments helps achieve the stated objectives.  In addition, the following disclosures describe the effects of the Company’s use of derivative instruments and hedging activities on its financial statements.
 
Foreign Exchange Risk
 
The Company has significant foreign operations, for which the functional currencies are denominated primarily in euros, Swiss francs, Japanese yen, Hong Kong dollars and Canadian dollars. As the values of the currencies of the foreign countries in which the Company has operations increase or decrease relative to the U.S. dollar, the sales, expenses, profits, losses, assets and liabilities of the Company’s foreign operations, as reported in the Company’s consolidated financial statements, increase or decrease, accordingly. Approximately 15% of the Company’s revenues for the six month period ended April 1, 2016 were denominated in currencies other than the U.S. dollar. Approximately 6% were denominated in euros, 5% were denominated in Canadian dollars and 2% were denominated in Hong Kong dollars, with the remaining revenues denominated in various other foreign currencies. Changes in foreign currency exchange rates can cause the Company to experience unexpected financial losses or cash flow needs.
 
 
 
 
13

 
JOHNSON OUTDOORS, INC.
 
The Company may mitigate a portion of the fluctuations in certain foreign currencies through the use of foreign currency forward contracts.  Foreign currency forward contracts enable the Company to lock in the foreign currency exchange rate to be paid or received for a fixed amount of currency at a specified date in the future. The Company may use such foreign currency forward contracts to mitigate the risk associated with changes in foreign currency exchange rates on financial instruments and known commitments, including commitments for inventory purchases, denominated in foreign currencies. As of April 1, 2016 and April 3, 2015, the Company held no foreign currency forward contracts.
 
 
13       FAIR VALUE MEASUREMENTS
 
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy has been established based on three levels of inputs, of which the first two are considered observable and the last unobservable.
 
· Level 1 - Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets or liabilities.

· Level 2 - Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments.

· Level 3 - Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

The carrying amounts of cash, cash equivalents, accounts receivable, and accounts payable approximated their fair values at April 1, 2016, October 2, 2015 and April 3, 2015 due to the short term maturities of these instruments. When indicators of impairment are present, the Company may be required to value certain long-lived assets such as property, plant, and equipment, and other intangibles at their fair value.

Valuation Techniques

Rabbi Trust Assets
Rabbi trust assets are classified as trading securities and are comprised of marketable debt and equity securities that are marked to fair value based on unadjusted quoted prices in active markets.  The rabbi trust assets are used to fund amounts the Company owes to certain officers and other employees under the Company’s non-qualified deferred compensation plan.  The mark to market adjustments are recorded in “Other expense (income), net” in the accompanying Condensed Consolidated Statements of Operations.

Goodwill and Other Intangible Assets
In assessing the recoverability of the Company’s goodwill and other indefinite lived intangible assets, the Company estimates the future discounted cash flows of the businesses to which such goodwill and intangibles relate.  When estimated future discounted cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any.  In determining estimated future cash flows, the Company makes assumptions regarding anticipated financial position, future earnings, and other factors to determine the fair value of the respective assets.  This calculation is highly sensitive to changes in key assumptions and could result in a future impairment charge.  The Company will continue to evaluate whether circumstances and events have changed to the extent that they require the Company to conduct an interim test of goodwill.  In particular, if the Company’s business units do not achieve short term revenue and gross margin goals, an interim impairment test may be triggered which could result in a goodwill impairment charge in future periods.
 
 
 
14

 
JOHNSON OUTDOORS, INC.

 
The following table summarizes the Company's financial assets measured at fair value as of April 1, 2016:

 
                         
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
     Rabbi trust assets
  $ 11,536     $ -     $ -     $ 11,536  
                                 
The following table summarizes the Company's financial assets measured at fair value as of October 2, 2015:
 
                                 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                               
     Rabbi trust assets
  $ 11,441     $ -     $ -     $ 11,441  
                                 
The following table summarizes the Company's financial assets measured at fair value as of April 3, 2015:
 
                                 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                               
     Rabbi trust assets
  $ 11,893     $ -     $ -     $ 11,893  
                                 
 
The effect of changes in the fair value of financial instruments on the Condensed Consolidated Statements of Operations for the three months ended April 1, 2016 and April 3, 2015 was:
 
 
Location of loss (income)
Three Months Ended
 
 
recognized in Statement of
April 1
 
April 3
 
 
Operations
 
2016
 
2015
 
Rabbi trust assets
Other expense (income), net
$ (9 )   $ (331 )
                 
The effect of changes in the fair value of financial instruments on the Condensed Consolidated Statements of Operations for the six month periods ended April 1, 2016 and April 3, 2015 was:
 
 
 
                 
 
Location of (income) loss
Six Months Ended
 
recognized in Statement of
Operations
 
April 1
2016
 
April 3
2015
 
Rabbi trust assets
Other expense (income), net
$ 54     $ (449 )

There were no assets or liabilities measured at fair value on a non-recurring basis in periods subsequent to their initial recognition for either of the three month periods ended April 1, 2016 or April 3, 2015.
 
14       NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) issued authoritative guidance under ASU 2014-09, Revenue from Contracts with Customers, which supersedes existing revenue recognition requirements and provides a new comprehensive revenue recognition model.  The underlying principle of the new standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for those goods or services.  This ASU will be adopted by the Company during the first quarter of fiscal 2018.  The Company is currently evaluating the impact that this standard will have on the consolidated financial statements.
 
 

 
 
15

 
JOHNSON OUTDOORS, INC.
 
 
On September 25, 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, requiring an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and to present or disclose the portion of the amount of adjustment recorded in current-period earnings by the line item where the adjustment would have been recorded in previous reporting periods if the adjustment had been recognized as of the acquisition date.  The Company has elected to adopt this accounting standard at the beginning of the second quarter of fiscal 2016.

On November 20, 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.”  Pursuant to this update, all deferred tax assets and liabilities, and any related valuation allowances are required to be classified as non-current on the balance sheet. The classification change for all deferred taxes as non-current simplifies entities’ processes as it eliminates the need to separately identify the net current and net non-current deferred tax asset or liability in each jurisdiction and allocate valuation allowances. The Company elected to retrospectively adopt this accounting standard in the beginning of the first quarter of fiscal 2016 and as a result, prior periods in our Consolidated Financial Statements were adjusted.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this update will increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect, if any, of this standard on its financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. Excess tax benefits for share-based payments will be recorded as a reduction of income taxes and reflected in operating cash flows upon the adoption of this ASU. Excess tax benefits are recorded in equity and as financing activity under the current rules.  The guidance will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. We are evaluating the impact of the future adoption of this standard on our consolidated financial statements.

 
15       SEGMENTS OF BUSINESS
 
The Company conducts its worldwide operations through separate business units, each of which represents major product lines. Operations are conducted in the United States and various foreign countries, primarily in Europe, Canada and the Pacific Basin. During the six months ended April 1, 2016, net sales to one customer of the Company’s Marine Electronics, Outdoor Equipment and Watercraft segments represented approximately $22,500 of the Company’s consolidated revenues.  The Company had no single customer that represented more than 10% of its total net sales during the six month period ended April 3, 2015.
 
Net sales and operating profit include both sales to customers, as reported in the Company's accompanying Condensed Consolidated Statements of Operations, and interunit transfers, which are priced to recover cost plus an appropriate profit margin. Total assets represent assets that are used in the Company's operations in each business segment at the end of the periods presented.
 
A summary of the Company’s operations by business unit is presented below:
 
 
 
16

 
JOHNSON OUTDOORS, INC.
 

                           
                           
   
Three Months Ended
   
Six Months Ended
   
   
April 1
   
April 3
   
April 1
   
April 3
 
October 2
   
2016
   
2015
   
2016
   
2015
 
2015
Net sales:
                         
Marine Electronics:
                         
Unaffiliated customers
  $ 90,865     $ 89,226     $ 149,423     $ 132,755    
Interunit transfers
    128       112       170       126    
Outdoor Equipment:
                                 
Unaffiliated customers
    11,609       12,149       17,915       18,522    
Interunit transfers
    7       8       15       17    
Watercraft:
                                 
Unaffiliated customers
    14,730       13,893       21,103       19,341    
Interunit transfers
    21       13       26       20    
Diving
                                 
Unaffiliated customers
    16,836       17,708       30,845       33,137    
Interunit transfers
    224       205       507       290    
Other / Corporate
    152       135       204       178    
Eliminations
    (380 )     (338 )     (718 )     (453 )  
Total
  $ 134,192     $ 133,111     $ 219,490     $ 203,933    
Operating profit (loss):
                                 
Marine Electronics
  $ 17,283     $ 11,130     $ 22,978     $ 9,543    
Outdoor Equipment
    999       1,070       797       725    
Watercraft
    831       -       296       (1,026 )  
Diving
    (704 )     (369 )     (2,578 )     (705 )  
Other / Corporate
    (3,271 )     (4,208 )     (7,255 )     (8,245 )  
    $ 15,138     $ 7,623     $ 14,238     $ 292    
Total assets (end of period):
                                 
Marine Electronics
                  $ 168,007     $ 170,510   $125,113
Outdoor Equipment
                    34,261       35,053  
 33,663 
Watercraft
                    33,329       32,255  
 20,898 
Diving
                    67,267       63,830  
 62,589 
Other / Corporate
                    51,925       41,203  
 56,941 
                    $ 354,789     $ 342,851   $299,204
 
 
1
16       ACCUMULATED OTHER COMPREHENSIVE INCOME
 
The changes in Accumulated Other Comprehensive Income (AOCI) by component, net of tax, for the three months ended April 1, 2016 were as follows:
 
 
 
 
17

 
JOHNSON OUTDOORS, INC.
 

                   
 
Foreign Currency Translation Adjustment
 
Unamortized Loss on Defined Benefit Pension Plans
 
Accumulated
Other Comprehensive Income (Loss)
 
Balance at January 1, 2016
  $ 8,476       (6,520 )     1,956  
Other comprehensive income before reclassifications
    3,048       -       3,048  
Amounts reclassified from accumulated other comprehensive income
    -       156       156  
Tax effects
    -       (59 )     (59 )
Balance at April 1, 2016
  $ 11,524     $ (6,423 )   $ 5,101  
                         
The changes in AOCI by component, net of tax, for the six months ended April 1, 2016 were as follows:
 
                         
 
Foreign Currency Translation Adjustment
 
Unamortized Loss on Defined Benefit Pension Plans
 
Accumulated
Other Comprehensive Income (Loss)
 
Balance at October 2, 2015
  $ 10,253     $ (6,616 )   $ 3,637  
Other comprehensive loss  before reclassifications
    1,271       -       1,271  
Amounts reclassified from accumulated other comprehensive income
    -       311       311  
Tax effects
    -       (118 )     (118 )
Balance at April 1, 2016
  $ 11,524     $ (6,423 )   $ 5,101  
                         
The changes in AOCI by component, net of tax, for the three months ended April 3, 2015 were as follows:
 
                         
 
Foreign Currency Translation Adjustment
 
Unamortized Loss on Defined Benefit Pension Plans
 
Accumulated
Other Comprehensive Income (Loss)
 
Balance at January 2, 2015
  $ 14,870     $ (5,561 )   $ 9,309  
Other comprehensive loss  before reclassifications
    (5,192 )     -       (5,192 )
Amounts reclassified from accumulated other comprehensive income
    -       85       85  
Tax effects
    -       (98 )     (98 )
Balance at April 3, 2015
  $ 9,678     $ (5,574 )   $ 4,104  
                         
The changes in AOCI by component, net of tax, for the six months ended April 3, 2015 were as follows:
 
                         
 
Foreign Currency Translation Adjustment
 
Unamortized Loss on Defined Benefit Pension Plans
 
Accumulated
Other Comprehensive Income (Loss)
 
Balance at October 3, 2014
  $ 18,424     $ (5,646 )   $ 12,778  
Other comprehensive income before reclassifications
    (8,746 )     -       (8,746 )
Amounts reclassified from accumulated other comprehensive income
    -       170       170  
Tax effects
    -       (98 )     (98 )
Balance at April 3, 2015
  $ 9,678     $ (5,574 )   $ 4,104  
                         

 
 
 
 
18

 
JOHNSON OUTDOORS, INC.
 
 
The reclassifications out of AOCI for the three month period ended April 1, 2016 were as follows:
           
           
         
Statement of Operations
         
Presentation
Unamortized loss on defined benefit pension plans
         
Amortization of loss
 
$
 156
 
Cost of sales / Operating expense
Tax effects
   
 (59)
 
Income tax expense (benefit)
Total reclassifications for the period
 
$
 97
   
           
           
The reclassifications out of AOCI for the three month period ended April 3, 2015 were as follows:
           
         
Statement of Operations
         
Presentation
Unamortized loss on defined benefit pension plans:
         
Amortization of loss
 
$
 85
 
Cost of sales / Operating expense
Tax effects
   
 (98)
 
Income tax expense (benefit)
Total reclassifications for the period
 
$
 (13)
   
           
           
The reclassifications out of AOCI for the six months ended April 1, 2016 were as follows:
           
         
Statement of Operations
         
Presentation
Unamortized loss on defined benefit pension plans:
         
Amortization of loss
 
$
 311
 
Cost of sales / Operating expense
Tax effects
   
 (118)
 
Income tax expense
Total reclassifications for the period
 
$
 193
   
           
           
The reclassifications out of AOCI for the six months ended April 3, 2015 were as follows:
           
         
Statement of Operations
         
Presentation
Unamortized loss on defined benefit pension plans:
         
Amortization of loss
 
$
 170
 
Cost of sales / Operating expense
Tax effects
   
 (98)
 
Income tax expense
Total reclassifications for the period
 
$
 72
   

 
 
19

 
JOHNSON OUTDOORS, INC.

 
17.       ACQUISITION
 
On October 27, 2015, the Company acquired all of the outstanding common stock of SeaBear GmbH (“SeaBear”) and related patents and other assets in a purchase transaction with SeaBear’s sole shareholder (the “Seller”).  SeaBear, founded and based in Leoben, Austria, specializing in the development of underwater instrumentation through unique application of existing, new and emerging technologies.
 
The approximately $5,250 acquisition cost was funded with existing cash and credit facilities. Approximately $1,115 of the purchase price was paid into a segregated escrow account which was set aside to fund potential indemnity claims that may be made by the Company against the Seller in connection with the inaccuracy of certain representations and warranties made by the Seller or related to the breach or nonperformance of certain other actions, agreements or conditions related to the acquisition, for a period of 18 months from the acquisition date.  The Company cannot estimate the probability or likelihood of bringing such an indemnity claim against the Seller or any related costs at this time.  Under certain circumstances, if government grants made to SeaBear prior to the closing are required to be repaid, the repayment will be funded by the escrow account.  The remaining escrow balance, if any, net of any indemnity claim or grant repayment then pending, will be released to the Seller once the 18 month period has lapsed.
 
The Company believes that sales of SeaBear’s innovative diving technology can be expanded through the Company’s global marketing and distribution networks.  The SeaBear acquisition is included in the Company’s Diving segment.
 
The Company is currently in the process of determining the fair value of the assets acquired and the liabilities assumed in this business combination and anticipates completing the valuation of intangibles and other assets within the next six months.  The following table summarizes the provisional fair values of the assets acquired and liabilities assumed, and the resulting goodwill acquired at the date of the SeaBear acquisition.


       
Recognized amounts of identifiable assets acquired and liabilities assumed
 
Accounts receivable
  $ 34  
Inventories
    179  
Other current assets
    42  
Property, plant and equipment
    28  
Identifiable intangible assets
    3,175  
Less, accounts payable and accruals
    200  
Less, long term liabilities
    289  
Total identifiable net assets
    2,969  
Goodwill
    2,281  
Net assets acquired
  $ 5,250  

An increase to the provisional fair value of identifiable intangible assets of $3,175 was made with a corresponding decrease to the provisional value of goodwill during the quarter ended April 1, 2016.
 
Transaction costs incurred for the acquisition to date were $465, of which $301 was recognized during the six months ended April 1, 2016.
 
 
20

 
JOHNSON OUTDOORS, INC.
 
 
Item 2             Management's Discussion and Analysis of Financial Condition and Results of Operations
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes comments and analysis relating to the results of operations and financial condition of Johnson Outdoors Inc. and its subsidiaries (collectively, the “Company”) as of and for the three and six month periods ended April 1, 2016 and April 3, 2015. All monetary amounts, other than share and per share amounts, are stated in thousands.
 
Our MD&A is presented in the following sections:
  • Forward Looking Statements
  • Trademarks
  • Overview
  • Results of Operations
  • Liquidity and Financial Condition
  • Contractual Obligations and Off Balance Sheet Arrangements
  • Criticial Accounting Policies and Estimates
This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related notes that immediately precede this section, as well as the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2015 which was filed with the Securities and Exchange Commission on December 8, 2015, and amended by Amendment No. 1 filed on December 11, 2015 with the Securities and Exchange Commission.

 
Forward Looking Statements
 
Certain matters discussed in this Form 10-Q are “forward-looking statements,” and the Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of those safe harbor provisions. These forward-looking statements can generally be identified as such because they include phrases such as the Company “expects,” “believes,” “anticipates,” “intends” or other words of similar meaning. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated.

Factors that could affect actual results or outcomes include the matters described under the caption "Risk Factors" in Item 1A of the Company’s Form 10-K which was filed with the Securities and Exchange Commission on December 8, 2015, and amended by Amendment No. 1 filed on December 11, 2015 with the Securities and Exchange Commission and the following:  changes in economic conditions, consumer confidence levels and discretionary spending patterns in key markets; the Company’s success in implementing its strategic plan, including its targeted sales growth platforms, innovation focus and digital presence; litigation costs related to actions of and disputes with third parties, including competitors, and matters related to the Company’s intellectual property rights; the Company’s continued success in its working capital management and cost-structure reductions; the Company’s ongoing success in meeting financial covenants in its credit arrangements with its lenders; the Company’s success in integrating strategic acquisitions; the risk of future writedowns of goodwill or other long-lived assets; the ability of the Company’s customers to meet payment obligations; movements in foreign currencies, interest rates or commodity costs; fluctuations in the prices of raw materials or the availability of raw materials used by the Company; the success of the Company’s suppliers and customers; the ability of the Company to deploy its capital successfully; unanticipated outcomes related to outsourcing certain manufacturing processes; unanticipated outcomes related to litigation matters; and adverse weather conditions. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this filing. The Company assumes no obligation, and disclaims any obligation, to update such forward-looking statements to reflect subsequent events or circumstances.
 
 
 
 
 
21

 
JOHNSON OUTDOORS, INC.
Trademarks
 
We have registered the following trademarks, which may be used in this report: Minn Kota®, Cannon®, Humminbird®, Silva®, Eureka!®, Jetboil®, Old Town®, Ocean Kayakä, Necky®,  Extrasport®, Carlisle®, and SCUBAPRO®.
 
Overview
 
The Company is a leading global manufacturer and marketer of branded seasonal outdoor recreation products used primarily for fishing, diving, paddling and camping.  The Company’s portfolio of well-known consumer brands has attained leading market positions due to continuous innovation, marketing excellence, product performance and quality.  The Company’s values and culture support innovation in all areas, promoting and leveraging best practices and synergies within and across its subsidiaries to advance the Company’s strategic vision set by executive management and approved by the Company’s Board of Directors.  The Company is controlled by Helen P. Johnson-Leipold, the Company’s Chairman and Chief Executive Officer, members of her family and related entities.
 
Highlights
 
Net sales of $134,192 for the second quarter of fiscal 2016 increased by 1% from the same period in the prior year.  Operating income for the quarter also compared favorably to the prior year by $7,515.  Higher margins and a decrease in legal expenses in the current quarter were the primary drivers of the quarterly profit improvement year over year.
 
Seasonality
 
The Company’s business is seasonal in nature. The second fiscal quarter falls within the Company’s primary selling season for its warm-weather outdoor recreation products.  The table below sets forth a historical view of the Company’s seasonality during the last three fiscal years.
 
                                     
   
Fiscal Year
 
   
2015
   
2014
   
2013
 
Quarter Ended
 
Net
Sales
   
Operating
Profit
   
Net
Sales
   
Operating
Profit
   
Net
Sales
   
Operating
Profit
 
December
    16 %     -41 %     19 %     -17 %     21 %     6 %
March
    31 %     43 %     29 %     69 %     31 %     49 %
June
    33 %     92 %     32 %     56 %     30 %     63 %
September
    20 %     6 %     20 %     -8 %     18 %     -18 %
      100 %     100 %     100 %     100 %     100 %     100 %
 
Results of Operations
 
The Company’s net sales and operating profit (loss) by segment for the periods shown below were as follows:
 
 
 
22

 
JOHNSON OUTDOORS, INC.
 
 
 
                         
                         
   
Three Months Ended
   
Six Months Ended
 
   
April 1
   
April 3
   
April 1
   
April 3
 
   
2016
   
2015
   
2016
   
2015
 
Net sales:
                       
Marine Electronics
  $ 90,993     $ 89,338     $ 149,593     $ 132,881  
Outdoor Equipment
    11,616       12,157       17,930       18,539  
Watercraft
    14,751       13,906       21,129       19,361  
Diving
    17,060       17,913       31,352       33,427  
Other / Eliminations
    (228 )     (203 )     (514 )     (275 )
Total
  $ 134,192     $ 133,111     $ 219,490     $ 203,933  
Operating profit (loss):
                               
Marine Electronics
  $ 17,283     $ 11,130     $ 22,978     $ 9,543  
Outdoor Equipment
    999       1,070       797       725  
Watercraft
    831       -       296       (1,026 )
Diving
    (704 )     (369 )     (2,578 )     (705 )
Other / Eliminations
    (3,271 )     (4,208 )     (7,255 )     (8,245 )
Total
  $ 15,138     $ 7,623     $ 14,238     $ 292  

See “Note 15 – Segments of Business” of the notes to the accompanying Condensed Consolidated Financial Statements for the definition of segment net sales and operating profit.
 
Net Sales
 
Consolidated net sales for the three months ended April 1, 2016 were $134,192, an increase of $1,081, or 1%, compared to $133,111 for the three months ended April 3, 2015.  Currency translation had a 1% unfavorable impact on net sales in the current year quarter compared to the prior year quarter.
 
Net sales for the three months ended April 1, 2016 for the Marine Electronics business were $90,993, up $1,655, or 2%, from $89,338 during the second fiscal quarter of the prior year.  The increase was driven by sales growth in both the Minn Kota® and Humminbird® brands.
 
Net sales for the Outdoor Equipment business were $11,616 for the second quarter of the current fiscal year, a decrease of $541, or 5%, from the prior year net sales during the same period of $12,157.  Decreases in sales in consumer camping were offset in part by an increase in military tents related to the pacing of orders.
 
Net sales for the second quarter of fiscal 2016 for the Watercraft business were $14,751 an increase of $845, or 6%, compared to $13,906 in the prior year period.  An increase in overall sell in of Old Town brand products and accessory lines was the primary driver of the growth year over year.
 
Diving net sales were $17,060 for the three months ended April 1, 2016 versus $17,913 for the three months ended April 3, 2015, a decrease of $853, or 5%.  Unfavorable foreign currency translation impacted Diving’s sales by approximately 1% versus the prior year’s first fiscal quarter.  Product availability and decreased sales to Middle Eastern and Asian markets negatively affected sales by 4% versus the prior year period.
 
For the six months ended April 1, 2016, consolidated net sales were $219,490 compared to $203,933 for the six months ended April 3, 2015.  Currency translation had a 1% unfavorable impact on net sales in the current year to date period compared to the first half of the prior fiscal year.
 
 
 
 
 
23

 
JOHNSON OUTDOORS, INC.
 
Net sales for the six months ended April 1, 2016 for the Marine Electronics business were $149,593, up $16,712, or 13%, from $132,881 during the first six months of the prior year.  Double digit increases in sales of both Minn Kota® and Humminbird® branded products drove the increase.
 
Net sales for the Outdoor Equipment business were $17,930 for the current year to date period, a decrease of $609, or 3%, from net sales during the same period of the prior year of $18,539.  The primary driver of the decline versus the prior year period was a decrease in sales of consumer camping products.
 
Net sales for the first six months of fiscal 2016 for the Watercraft business were $21,129, an increase of $1,768, or 9%, compared to $19,361 in the prior year period. An overall increase in the paddling market was the primary driver of the growth year over year.
 
Diving net sales were $31,352 for the six months ended April 1, 2016 versus $33,427 for the six months ended April 3, 2015.  The 6% decline year over year was driven, in part, by a 4% unfavorable impact from currency translation.
 
Cost of Sales
 
Cost of sales for the three months ended April 1, 2016 was $79,197 compared to $81,175 for the three months ended April 3, 2015.  The decrease year over year, despite higher net sales, was driven in part by lower material costs and higher overhead absorption.  Cost of sales for the six months ended April 1, 2016 was $131,196 compared to $124,663 in the same period of the prior year.  The increase was primarily driven by the increase in sales volume.
 
Gross Profit Margin
 
For the three months ended April 1, 2016, gross profit as a percentage of net sales was 41.0% compared to 39.0% in the three month period ended April 3, 2015.  Lower material costs, a favorable product mix and favorable production volume variances helped drive the increase in margin during the quarter ended April 1, 2016.  For the six months ended April 1, 2016, gross profit as a percentage of net sales was 40.2% compared to 38.9% in the six months ended April 3, 2015.  Similar to the quarter comparison, lower material costs, a favorable product mix and favorable production volume variances helped drive the increase in margin in addition to increased pricing implemented to address the effect of foreign currency translation in certain markets.
 
Operating Expenses
 
Operating expenses were $39,857 for the three months ended April 1, 2016 compared to $44,313 for the three months ended April 3, 2015.  The decrease of $4,456 was primarily due to approximately $2,900 of legal expenses incurred in the prior year quarter in connection with litigation commenced by the Company against a competitor relating to infringement of the Company’s patented Side Imaging® sonar technology which such expenses didn’t continue into the current year quarter.  Additionally, approximately $1,400 of the decrease was due to lower warranty and promotional expenses in the current year quarter.
 
Operating expenses were $74,056 for the six months ended April 1, 2016 compared to $78,978 in the prior year six month period.  The $4,922 decrease year over year was driven primarily by approximately $5,400 of legal expense incurred in the prior year to date period in connection with the patent infringement litigation noted above for the quarter.
 
Operating Profit
 
Operating profit on a consolidated basis for the three month period ended April 1, 2016 was $15,138 compared to an operating profit on a consolidated basis of $7,623 in the second quarter of the prior fiscal year.   Operating profit on a consolidated basis for the six months ended April 1, 2016 was $14,238 compared to an operating profit of $292 in the prior year to date period.  The legal expense incurred in the prior year in connection with the litigation described above  and higher sales volumes were the primary driver of the improvement in operating profit year over year.
 
 
 
24

 
JOHNSON OUTDOORS, INC.
 
Interest
 
For the three months ended April 1, 2016, interest expense was $297 compared to $316 in the three months ended April 3, 2015.  For the six months ended April 1, 2016, interest expense totaled $487 compared to $503 for the six months ended April 3, 2015.
 
Interest income for each of the three and six month periods ended April 1, 2016 and April 3, 2015 was less than $100.
 
Other (Income) Expense, net
 
Other expense was $182 for the three months ended April 1, 2016 compared to other expense of $495 in the prior year period.  For the three months ended April 1, 2016, foreign currency exchange losses were $243 compared to losses of $837 for the three months ended April 3, 2015.  Investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan were $41 in the three month period ended April 1, 2016 compared to net earnings and gains of $361 in the three month period ended April 3, 2015.
 
Other income for the six months ended April 1, 2016 was $381 compared to income of $77 for the six months ended April 3, 2015.  For the six months ended April 1, 2016, foreign currency exchange gains were $21 compared to losses of $606 for the six months ended April 3, 2015.  Net investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan were $335 in the six month period ended April 1, 2016 compared to $677 in the six month period ended April 3, 2015.
 
Income Tax Expense
 
The Company’s provision for income taxes is based upon estimated annual effective tax rates in the tax jurisdictions in which the Company operates.  The effective tax rate for the three and six month periods ended April 1, 2016 was 36.5% and 37.9%, respectively, compared to 46.5% and -426.9% in the corresponding periods of the prior year.
 
The decrease in the Company’s effective tax rate for the three months ended April 1, 2016 versus the prior year quarterly period was primarily due to variances in income for entities with a valuation allowance in prior year period and the unfavorable discrete state tax expense items recorded in the prior year period.  The Company’s effective tax rate for the six months ended April 1, 2016 versus the prior year period is not meaningful due to the prior year period small amount of loss before income taxes.

Net Income (Loss)
 
Net income for the three months ended April 1, 2016 was $9,321, or $0.93 per diluted common class A and B share compared to $3,646, or $0.36 per diluted common class A and B share, for the second quarter of the prior fiscal year.  Net income for the six months ended April 1, 2016 was $8,787, or $0.88 per diluted common class A and B share compared to a net loss of $548, or ($0.06) per diluted common class A and B share, for the corresponding period of the prior year.
 
Liquidity and Financial Condition
 
Cash, net of debt, was $13,393 as of April 1, 2016, compared to debt, net of cash of $6,786 as of April 3, 2015.  The Company's debt to total capitalization ratio was 15% as of April 1, 2016 and 23% as of April 3, 2015.  The Company’s total debt balance was $37,545 as of April 1, 2016 compared to $55,692 as of April 3, 2015.  See “Note 11 – Indebtedness” in the notes to the Company’s accompanying condensed consolidated financial statements for further discussion.
 
Accounts receivable, net of allowance for doubtful accounts, were $102,786 as of April 1, 2016, a decrease of $8,031 compared to $110,817 as of April 3, 2015.
 
Inventories, net of inventory reserves, were $89,769 as of April 1, 2016, an increase of $10,017 compared to $79,752 as of April 3, 2015.  The increase in inventory was due in large part to increases in Marine Electronics inventory that will be used to satisfy increased order volume.
 
Accounts payable were $40,966 at April 1, 2016, compared to $40,923 as of April 3, 2015.
 
 
 
25

 
JOHNSON OUTDOORS, INC.
 
The Company’s cash flow from operating, investing and financing activities, as reflected in the Company’s accompanying Condensed Consolidated Statements of Cash Flows, is summarized in the following table:
             
   
Six Months Ended
 
(thousands)
 
April 1
2016
   
April 3
2015
 
Cash (used for) provided by:
 
 
       
Operating activities
  $ (35,495 )   $ (57,842 )
Investing activities
    (10,858 )     (4,163 )
Financing activities
    27,783       45,742  
Effect of foreign currency rate changes on cash
    349       (5,624 )
Decrease in cash and cash equivalents
  $ (18,221 )   $ (21,887 )

 
Operating Activities
 
Cash used for operations totaled $35,495 for the six months ended April 1, 2016 compared with $57,842 during the corresponding period of the prior fiscal year.  The increase in net income and lower outstanding receivables balances drove the reduction in cash used for operating activities year over year.
 
Amortization of deferred financing costs, depreciation and other amortization charges were $5,711 for the six month period ended April 1, 2016 compared to $5,732 for the corresponding period of the prior year.
 
Investing Activities
 
Cash used for investing activities totaled $10,858 for the six months ended April 1, 2016 and included acquisitions of $5,250.  The remaining $5,608 and the entire $4,163 for the corresponding period of the prior year consisted of cash usage for capital expenditures (net of any proceeds from sales of property, plant and equipment).  The Company’s recurring investments are made primarily for software development and tooling for new products and enhancements on existing products. Any additional expenditures in fiscal 2016 are expected to be funded by working capital or existing credit facilities.
 
Financing Activities
 
Cash flows provided by financing activities totaled $27,783 for the six months ended April 1, 2016 compared to cash flows provided by financing activities of $45,742 for the six month period ended April 3, 2015. The Company made principal payments on term notes and other long-term debt of $180 during the six month period ended April 1, 2016. For the six month period ended April 3, 2015, the Company made principal payments on term notes and other long-term debt of $183.
 
The Company’s term loans have a maturity date of September 29, 2029.  Each term loan requires monthly payments of principal and interest. Interest on the aggregate outstanding amount of the term loans is based on the prime rate plus an applicable margin.  The interest rate in effect on the term loans was 5.5% and 5.25% at April 1, 2016 and April 3, 2015, respectively.
 
The aggregate term loan borrowings are subject to a pre-payment penalty.  The penalty is currently 4% of the pre-payment amount, and the penalty will decrease by 1% annually on the anniversary date of the effective date of the applicable loan agreement.
 
On September 16, 2013, the Company and certain of its subsidiaries entered into a credit facility with PNC Bank National Association and certain other lenders.  This credit facility consists of a Revolving Credit Agreement dated September 16, 2013 among the Company, certain of the Company’s subsidiaries, PNC Bank National Association, as lender and as administrative agent, and the other lenders named therein (the “Revolving Credit Agreement” or “Revolver”).  The Revolver has an expiration date of September 16, 2018 and provides for borrowing of up to an aggregate principal amount not to exceed $90,000 with an accordion feature that gives the Company the option to increase the maximum seasonal financing availability subject to the conditions of the Revolving Credit Agreement and subject to the approval of the lenders.  The Revolver imposes a seasonal borrowing limit such that borrowings may not exceed $60,000 from the period June 30th through October 31st of each year under the agreement.  Balances carried on the Revolving Credit Agreement of $60,000 or less may be repaid at the Company’s discretion at any time through the maturity date.
 
 
 
26

 
JOHNSON OUTDOORS, INC.
 
The interest rate on the Revolver resets each quarter and is based on LIBOR plus an applicable margin.  The applicable margin ranges from 1.25% to 2.00% and is dependent on the Company’s leverage ratio for the trailing twelve month period.  The interest rate on the Revolver at April 1, 2016 and April 3, 2015 was approximately 1.7% and 1.4%, respectively.
 
The Revolver is secured with a first priority lien on working capital assets and certain patents and trademarks of the Company and its subsidiaries and a second priority lien on land, buildings, machinery and equipment of the Company’s domestic subsidiaries.  Under the ter